Lending Standards Have Relaxed. Is This Such a Bad Thing?

If lenders have anything to do with it, the economic recovery could be far from over.

Apr 12, 2014 at 12:12PM

Hammock
Source: Flickr / Florin Gorgan.

Do you remember just after the financial crisis when it was nearly impossible to get a loan for anything unless you had a fantastic credit score? Well, it appears those days might be over. According to recent data, right now is the easiest time in five years to get a new loan for a home or car. Easier, but responsible, credit will have positive effects on several areas of the economy. Consumer spending, real estate prices, and many corporations all stand to benefit here, so let's take a closer look at what easy credit could mean for you and your investments.

What do we mean by "easier" credit?
Now, credit may seem that it's getting easier to come by, but things are still pretty tight on a historical basis. Before the financial crisis, there were all sorts of  "crafty" loan products that were pretty much there so that anyone could qualify for a house, regardless of their income or credit rating. Does anyone remember the phrase "no-doc loan"? There were lenders offering "zero-down financing with a 575 credit score", even if the borrower was one day out of bankruptcy!

Magnifying

Source: Flickr / Okko Pykko.

Thankfully the shady loan products don't exist anymore, and lenders are relaxing their credit standards in a responsible manner. The notion that everyone should be able to buy a house is a faulty one, but so is the notion that only those with perfect credit will pay a loan back. For instance, the average credit score of consumers who received a mortgage peaked at 750 in 2012, which is universally considered top-tier credit by lenders.  The right way is somewhere in the middle of how things were in 2005 and how they were a few years after, and that's where we seem to be gravitating toward now.

According to bankrate.com, about 27% of U.S. consumers have a FICO score that is between 600 and 700, a range that is mostly considered "near-prime". So, if a certain lender lowers the minimum credit score to buy a new car from 660 to 640, they could be adding more than 5% of the population to their customer base, assuming an even distribution of scores in that range.

More companies benefit from home and car sales than you may think
The most interesting effect of easier credit has to do with the wide variety of companies that can benefit, both directly and indirectly. Direct beneficiaries will be the banks, who will be making more loans, as well as the auto companies and homebuilders who will be selling more cars and homes.

Construction

Source: Flickr / pdz_house.

But, there's more. If more people can buy new homes, retailers like Home Depot and Lowes will sell more building materials. Insurance companies will sell more homeowners' insurance. Roofers, plumbers, and electricians will all have more business. This is not to mention how the employees of these companies will have more work and earn more money to spend at other businesses.

When people buy more new cars, the railroads and other transportation companies will have more cargo to haul. Companies that produce the stereos, alarm systems, navigation systems, and other electronics for the car manufacturers will make more money. Governments will collect more taxes from the sale of more new vehicles, which could then be spent to fund more public sector jobs.

How it will affect your bottom line
As a consumer, you could start to qualify for loans and credit cards that you couldn't before, and you might start to get offers of lower interest rates than you have been seeing.

As an investor, this should help the overall economic recovery in the United States, but there are a few sectors that should especially benefit from easier credit. The banking, automotive, and homebuilding industries will gain the most, but looser lending standards should positively affect the entire market, provided the banks learned their lesson from the financial crisis and know when to say "no".

The best way to invest in banking
Do you hate your bank? If you're like most Americans, chances are good that you answered yes to that question. While that's not great news for consumers, it certainly creates opportunity for savvy investors. That's because there's a brand-new company that's revolutionizing banking, and is poised to kill the hated traditional brick-and-mortar banking model. And amazingly, despite its rapid growth, this company is still flying under the radar of Wall Street. To learn about about this company, click here to access our new special free report.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers